Saturday, 15 March 2008

Analysis of Bear Stearn's sad sub-prime debacle

Lots and lots have been written and discussed about Sub priming and it has become a household name/phenomenon lately ( to the extent that it gives 20+ million result pages on a simple google hit, though the losses are 1000+ times of that) . World has been witnessing the aftermath of the sub-prime crisis and it doesn’t just seem to stop.
The latest emerging news about sub-prime crisis has been that of Bear Stearns debacle. Bear’s being the fifth largest investment bank in the US, is an unique and elite among the world’s financial institutions.
Bear Stearn has taken a heavy toll out of the subpriming (shares have fallen by 47%) and is limping hard to survive. If one were to take a closer look , there are lots of lessons one can learn about the complexities of the financial products and the implication of capitalistic drive when allowed to take a risky form , how hard it can hit the poor investors.In Nassim Taleb’s words Bear Stearn has proved that “Sub Priming” is a true Black Swan, nobody was able to predict about it and now people are conveniently fitting theories to explain it retrospectively.

Coming to our story, Bear Stearn's doesn’t deal with the common man; it is a wall street up market bank that has very close intricate web of interactions with the top banks (FT says it has been doing plumbing for them) and financial groups.
It had a huge exposure to the complex mortgage backed securities and the when the liquidity started evaporating from the market after the sub-prime bubble bust, it has started facing the tunes from the same who were pumping money to it. Fearing that BS may fail, Overnight, everybody have started liquidating Bear instruments and daytime and afternoon lending has also become very difficult for them and FED had to come to rescue to save them from the worst (to get their coffee machines working too).

Ironically the FED regulations (web says it is designed to protect only the direct impacts of common man) doesn’t allow them to directly lend to BS as it is not a regular type of a bank and JP MC had to play a middle man to facilitate the short-term (28 days) bail out.
JPMC has got nothing to lose as the risk will be underwritten by the Fed and it is just facilitating and by putting its skin to the game, it could very well emerge as a potential buyer of Bear Stearn's at dire cheap rates (Otherwise, It is hard to imagine this to be a patriotic act from the astute business man Jamie Dimon, the CEO of JPMC) .
Ironically during the Long-Term Capital Management crisis in the late 1990’s it is the same company (thanks to the retired CEO Jimmy Cayne who must be playing his usual bridge games now) which refused to co-operate in the bail out. Yet when they are in a similar situation the Bernanke(Fed Cheif) can’t refrain from saying that “You clear your own mess!” as this could further lead into the systemic failure of the financial backbones of US. So all those daring darling, dont worry Uncle Bern is there to help you.

Simply put Bear Stearn's case could just be a starting of a scary blood shed of those who seemed to understand (did you?) the complex and so called innovative financial instruments are all getting axed one by one (another one was Carlyle group last week) apart from those daunting write-downs by the likes of Citi, Meryll Lynch, UBS etc which we all know. Sad stories apart , this has become a happy hunting ground for the cash rich sovereign funds and the IS-MOON-AVAILABLE-FOR-BUYING kind of oil rich sheikhs to get huge stakes at low costs in the name of bailing the struggling co’s out.

While we are talking about these financial giants, very few people talk about the pension funds who have invested heavily betting on these financial innovators, it would be hard to see those poor men (women as well) who are sleeping peacefully unknowing the fact that their savings and future protection is being blown away under their nose by daring fund managers. So are we moving to an era of simplicity?
Hello Mr Not so rich investor, please dont read anything into sub-prime, credit swaps, options over futures, leveraged investments, spread betting over options and other head-spinning mumbo's instead you can buy gold and keep it under your pillow or you can invest in rare stamps (Stanley Gibbons )and please keep them in your purse always.